Miles Kimball on the Evils of Public Debt

     He tries again to adjudicate his skirmish with Krugman but I still don't think he gets it. The title of his piece is actually "Why Austerity is Bad Policy" and there's no way to disagree with him there. 

    "Austerity is in vogue. For some time now, countries in Europe have been raising taxes and cutting government spending because they are worried about their national debt. They have hit on the word austerity to describe these tax increases and government spending cuts. The US is now following suit."

    "But the trouble with austerity is that it is contractionary—that is, austerity tends to slow down the economy. In bad economic times, people can’t get jobs because businesses aren’t hiring, and businesses are not hiring because people aren’t spending. So in bad economic times, it adds insult to injury when the government does less spending, less hiring, and taxes more money out of the pockets of those who would otherwise spend."

     "The contractionary effect of austerity creates a dilemma, not only because a slower economy is painful for the people involved—that is, just about everyone—but also because tax revenue falls when the economy slows down, making it harder to rein in government debt. This dilemma has fueled a big debate.  There are four basic positions:

1.     Arguing that austerity can actually stimulate the economy, as long as it is implemented gradually. That is the position John Cogan and John Taylor take in their Wall Street Journal op-ed, “How the House Budget Would Boost the Economy,” which I questioned in my column, “The Stanford economists are so wrong: A tighter budget won’t be accompanied by tighter monetary policy.”

2.     Arguing that debt is so terrible that austerity is necessary even if it tanks the economy. This is seldom argued in so many words, but is the implicit position of many government officials, both in Europe and the US.

3.     Arguing that the economy is in such terrible shape that we have to be willing to increase spending (and perhaps cut taxes) even if it increases the debt. This is the position taken by economist and New York Times columnist Paul Krugman. Indeed, Krugman is so intent on arguing that the government should spend more, despite the effect on the debt, that in many individual columns he appears to be denying that debt is a serious problem.  A case in point is his reply, “Another Attack of the 90% Zombie,” to my column emphasizing the dangers of Italy’s national debt, “What Paul Krugman got wrong about Italy’s economy.”  (In addition to this column, I responded on my blog.)

4.     Arguing that there are ways to stimulate the economy without running up the national debt.  This is what I also argue in my column on Krugman. For the US, the most important point is that using monetary policy to stimulate the economy does not add to the national debt and that even when interest rates are near zero, the full effectiveness of monetary policy can be restored if we are willing to make a legal distinction between paper currency and electronic money in bank accounts—treating electronic money as the real thing, and putting paper currency in a subordinate role. (See my columns, “How paper currency is holding the US recovery back” and “What the heck is happening to the US economy? How to get the recovery back on track.”)"

     http://qz.com/69302/austerity-is-bad-economic-policy/

     The trouble is that there's some ambiguity here. He claims there's a way to stimulate the economy-without running up the national debt-which is basically the Monetarist position. This is Sumner's basic position as well. Still what's not clear to me is assuming he's wrong about 4-there is no way to stimulate the economy without running up debt, what is his preference? As he sees more debt as an evil, is it a greater evil than the pain of a slow recovery? Sumner recently made it sound at least-though it's often difficult to be sure-that while he prefers bond buying, he'd prefer even a helicopter drop-which is a fiscal action-to the Austrian solution-allowing a long term driving down of wages. 

     ", if wages are too high, and wages are sticky, then the solution is to raise NGDP.  I favor straight monetary stimulus, but if that won’t work then even a helicopter drop would be preferable to waiting years for wage cuts to restore equilibrium.  You can believe wage stickiness is the root cause of unemployment, and also favor the sort of AD stimulus that Krugman would regard as “progressive.”

     http://www.themoneyillusion.com/?p=20421

     The title of this Sumner piece was "The Third Way." As Kimball is basically arguing for the Monetarist third way as well-Monetarism since Friedman is really the promise that we can stimulate the economy without running up debt-I'd like to be clear what Kimball's preferences are. If 4 isn't true or even not as true as he thinks-ie, monetary policy is not strong enough to fix it all by itself-would he prefer the economy to remain slower and would he accept what would be a necessary evil of more government debt. 

      If his answer is no then it seems that there's very little he can say to Keynesians like Krugman as he's basically saying the pain of "just about everybody" is preferable to more government debt. I would find this position perverse-if that were what he's saying. Note though if it's not what he's saying then he's admitting that whatever the evils of increased public debt are, they aren't the worse thing in the world. If 4 isn't true then we're better off following Krugman and not worrying about the debt. This was basically what we did in WW11 and despite the massive public debt we left the war with we were able to pay it off by the early 70s without pain. 

      He again discusses his idea of avoiding the Zero Bound: moving to electronic money. Sumner finally looked at this idea yesterday. He points out that in the long term this is probably where we're headed anyway, so what Kimball's proposal really amounts to is accelerating the process. Sumner seems less optimistic than Kimball that moving off paper money will solve the problem by itself. 

     http://www.themoneyillusion.com/?p=20489

    Part of what had rankled Krugman about his Italy piece is that he seemed to be failing to distinguish between a country like Italy or Greece and countries like Britain or the U.S.: anyone who says "If we don't rein in this burgeoning debt soon we're going to become another Greece" has already abdicated any credibility. While he chides Krugman for making it sound like there's no risk in debt, his piece gives the impression that there's no difference between Britain and Italy. 

    We'll see whether Krugman answers this latest piece, however, if he does, I can already see something that will again rankle him when Kimball explains what's so pernicious about government debt:

     "To understand the other costs of debt, think of an individual going into debt. There are many appropriate reasons to take on debt, despite the burden of paying off the debt:

• To deal with an emergency—such as unexpected medical expenses—when it was impossible to be prepared by saving in advance.
• To invest in an education or tools needed for a better job.
• To buy an affordable house or car that will provide benefits for many years.

     "There is one more logically coherent reason to take on debt—logically coherent but seldom seen in the real world:

• To be able to say with contentment and satisfaction in one’s impoverished old age, “What fun I had when I was young!”

      "In theory, this could happen if when young, one had a unique opportunity for a wonderful experience—an opportunity that is very rare, worth sacrificing for later on. Another way it could happen is if one simply cared more in general about what happened in one’s youth than about what happened in one’s old age."

      "Tax increases and government spending cuts are painful. Running up the national debt concentrates and intensifies that pain in the future. Since our budget deficits are not giving us a uniquely wonderful experience now, to justify running up debt, that debt should be either (i) necessary to avoid great pain now, or (ii) necessary to make the future better in a big enough way to make up for the extra debt burden. The idea that running up debt is the only way to stimulate an economic recovery when interest rates are near zero is exactly what I question in my previous column about Italy’s economy. If reforming the way we handle paper currency made it clear that running up the debt is not necessary to stimulate the economy, what else could justify increasing our national debt? In that case, only true investments in the future would justify more debt: things like roads, bridges, and scientific knowledge that would still be there in the future yielding benefits—benefits for which our children and we ourselves in the future will be glad to shoulder the burden of debt."

     Kimball again repeats the "government is like a family" fallacy that Krugman has spent so much time debunking. He has recently had some success as President Obama recently argued that the government is not like a family: in 2011 he was saying it was. That really is the egregious part of his explanation here: he explains why government debt is so bad by discussing why it's bad for an individual. As a government's  finances bear no resemblance to an individual, this doesn't work. 

     There are two  additional things about public debt that Kimball doesn't even mention which will not persuade anyone like Krugman or anyone who in any sense considers themselves "Keynesians."

    1.) He doesn't acknowledge that debt is not a fixed  quantity but in fact tends to increase dramatically during a deep recession. When inflation scolds warn us that our debt will lead us to  70s style "stagflation" they fail to get that in the 70s our public debt was quite manageable. A nation's public debt is not fixed for all time. Kimball makes it sound like it can only go up and up. You'd never get from reading him that it can also go down for reasons other than budget cuts or tax increases. 

     When the economy is stronger, increases tax receipts will bring down the debt along with the deficit. In this sense we should look at the "structural debt" rather than the absolute amount. 

    2). Above I alluded to the post WWII debt which we were able to pay for without pain-and this was prior to the Nixon Surprise so then unlike now we didn't have the luxury of printing limitless money. 

    UPDATE: In this piece I discussed the implications if 4 isn't true. However, of course, he is claiming that it is true. This comes down to an old debate between Monetarists and "Fiscalists"-ie, Keynesians. Keynesians at least have some doubts that 4 is true. 

    Monetarists argue that demand stabilization can and should be handled solely by monetary policy.    They argue this is preferable as it won't run up more debt. To be sure, those who oppose both monetary and fiscal action-Austrians, or RBC types-see monetary policy as having some ill effects along the lines of fiscal policy. They agree that public debt is an evil but they see monetary policy expanding the monetary base in the same terms. Indeed, we're always hearing opponents of monetary policy worry about what happens when the Fed finally has to unwind it's position. 

   As a Keynesian I don't totally believe 4. I don't see monetary policy able to do all the heavy lifting on it's own. I see both monetary and fiscal policy as having a part to play. However, I also don't see   government debt as the problem Miles does. I also can't help but note that in his explanation he spoke about private debt and why it's better for an individual to not be in debt.